State Strategies to Preserve SALT Deductions

Running head: ANALYSIS OF THE $10000 SALT CAP
To: Senior Partner
From:
Date: 19.8.2019
Re: Analysis of the $10000 SALT CAP

ANALYSIS OF THE $10000 SALT CAP1
Table of Contents
Issue and Conclusion...................................................................................................................2
Analysis........................................................................................................................................2
References....................................................................................................................................5

ANALYSIS OF THE $10000 SALT CAP2
Issue and Conclusion
In the given situation, the issue is related to the limitation of an individual’s itemized
deduction for State and Local Taxes (SALT) to $10000 per year. This limitation encouraged
many state legislatures to circumvent the tax rule and establish a charitable fund that provided a
100% deduction on the amount of contribution made. Other issues arising from this limitation
are related to the deductions available for contributions made to the section 170(c) entities and
people involved in contributing to state tax credit programs. The financial incentives of these
people declined due to the introduction of the cap by the Tax Cut and Jobs Act (TCJA) (Gamage
& Shanske, 2018). The treasury department and the Internal Revenue Services (IRS) published a
series of rules and regulations to address these issues in the form of Safe Harbor, ignoring the
15% credit and carrying forward of tax credit in case of states where such carrying forward was
allowed by the state legislations. Dollar-to-dollar bill credit was another step taken to mitigate
the risk of the taxpayers contributing under the tax credit schemes.
Analysis
Section 164(a) of the IRC code allows a deduction for the payment of certain taxes that
include state, local and foreign, real property taxes, state and local personal property taxes and
state and foreign, income, war profits and excess profit taxes. However, section 164(b) (6),
added by section 11042(a) of The Tax Cuts and Jobs Act (TCJA), provides that there would not
be any deduction allowed for foreign real property taxes under section 164(a)(1) and limits the
individual’s deductible tax limit to $10000. This is limited to $5000 in case of a married couple
filing a separate return. Also known as the State and Local Taxes (SALT) cap, this limit applies
to taxable years beginning after 31 December 2017 and ending before 1 January 2026. Due to